Mamta Binani & Associates Contributor

Company Secretaries CS. Gururaj Sriram

Kolkata| Pune| Chennai| Mumbai| Guwahati (Senior Partner)
Website: www.mamtabinaniandassociates.com
Connect:mamtabinaniandassociates@gmail.com (M)- 99946 69266

Short notes on Companies (Appointment and Qualification of Directors)

Amendment Rules, 2022.

Introduction

In the year April 2020, the Government of India has reviewed the Foreign
Direct Investment (FDI) policy for curbing opportunistic
takeovers/acquisitions of Indian companies due to the COVID-19 pandemic
situation and amended para 3.1.1 of extant FDI policy as contained in
Consolidated FDI Policy, 2017. Department for Promotion of Industry and
Internal Trade, Ministry of Commerce and Industry has issued Press Note
No. 3(2020 Series)
The extract of the press note is given below: -

1
“Para 3.1.1:

3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy
except in those sectors/activities which are prohibited. However, an entity of
a country, which shares land border with India or where the beneficial
owner of an investment into India is situated in or is a citizen of any
such country, can invest only under the Government route. Further, a
citizen of Pakistan or an entity incorporated in Pakistan can invest, only
under the Government route, in sectors/activities other than defence, space,
atomic energy and sectors/activities prohibited for foreign investment.

3.1.1(b) In the event of the transfer of ownership of any existing or future

FDI in an entity in India, directly or indirectly, resulting in the beneficial
ownership falling within the restriction/purview of the para 3.1.1(a), such
subsequent change in beneficial ownership will also require
Government approval.

The above decision will take effect from the date of FEMA notification.” …….

Page 1 of 7
Recent News
2
The Ministry of Corporate Affairs (MCA) has registered over 700 cases
across the country against companies with Chinese nationals as promoters
and directors which recorded 'suspicious transactions' or 'dubious
credentials'. The move followed intelligence inputs shared by the home
ministry that the firms were 'misused' for various purposes, including
'evasion of taxes' and 'money laundering'.

During the month of April 2022 there were news that, The Economic
3.

Offences Wing (EOW) of the Mumbai police has registered 34 FIRs against
150 people, including five dozen foreigners, for allegedly violating laws of
registration of new companies and for fraudulently becoming directors of
Indian companies and not following due procedure. Among the 60 foreign
nationals booked 40 are from China.

To address the above issues, now the ministry of Corporate Affairs has made
the amendment in Companies (Appointment and Qualification of Directors)
Amendment Rules ,2022. Through this amendment now the Ministry of
Corporate Affairs has mandated the requirement for obtaining security
clearance from the Ministry of Home Affairs for applying DIN number and
Appointment of Directors in Indian Company for the persons who are
nationals of a country which shares land border with India.

Security Clearance requirements in other Departments or Ministries in India

At present the security clearance is required for appointment of Directors in

Company which are involved in the business of defence, Aviation and Ports
etc.

According to Arms Act, 1959 and Arms Rules 2016, the Directors of the
Company which is involved in the business of manufacturing Arms and
Ammunitions has to obtain the security clearance from the Ministry of
Home Affairs.

The check list and security clearance Performa details prescribed by

Ministry of home affairs can be downloaded from the following web link with
respect to arms and ammunitions companies: -

https://www.mha.gov.in/sites/default/files/L4No2018Arms.pdf

Further, the security clearance is also required for appointment of Directors

in Company which is involved in the business of Scheduled Operators, Non-
scheduled Operators of Air charters and Airlines as per Aircrafts Rules 1937
and Para No.6 of Civil Aviation Requirements (CAR)-Series -N -Part-I .

Page 2 of 7
The Ministry of Civil Aviation in its order dated 23 rd March 2018 has
mandated all the Scheduled and Non-scheduled Operators of Air Transport
companies to get the security clearance of its Company Directors and failing
of which the Punitive action will be taken against them.

https://www.civilaviation.gov.in/sites/default/files/Appointment%20of
%20Directors%20without%20Security%20Clearance%20-%20violation%20of
%20Civil%20Aviation%20Requirement%28CAR%29.pdf

The application for security clearance for the Directors of the company
which is involved in Air Transport services has to be filed through online
portal .

https://esahaj.gov.in/

This portal is owned by ministry of civil aviation.

Further the security clearance application for Foreign nationals for any other
purposes can be made through the following online portal

https://scponline.mha.gov.in/mpis/login

And also to the Internal Security-Division-I of Ministry of Home affairs , New

Delhi.

https://www.mha.gov.in/division_of_mha/internal-security-i-division

https://www.mha.gov.in/sites/default/files/filefield_paths/IS-
iiNTERNALsECURITY_18122017.pdf

4
Companies (Appointment and Qualification of Directors) Amendment
Rules, 2022

The Amended rules is extracted below:-

(i) in rule 8, after the proviso, the following proviso shall be inserted, namely:-

“Provided further that in case the person seeking appointment is a national of

a country which shares land border with India, necessary security clearance
from the Ministry of Home Affairs, Government of India shall also be attached
alongwith the consent.”;

(ii) in rule 10, in sub-rule (1), the following proviso shall be inserted, namely: -

Page 3 of 7
“Provided that no application number shall be generated in case of the person
applying for Director Identification Number is a national of a country which
shares land border with India, unless necessary security clearance from the
Ministry of Home Affairs, Government of India has been attached alongwith
application for Director Identification Number.”.

(iii) in the Annexure, -

(A) in Form DIR-2, under the heading Declaration, the existing paragraph,
shall be numbered as paragraph (i) thereof and after the paragraph (i) as so
numbered, the following shall be inserted, namely: -

“(ii) I further declare that -

I am not required to obtain the security clearance from the Ministry of Home
Affairs,

Government of India before seeking appointment as director; or I am required

to obtain the security clearance from the Ministry of Home Affairs,
Government of India before seeking appointment as director and the same
has been obtained and is attached.”;

(B) in FORM NO. DIR-3, under the heading Verification, after serial number 3,
the following serial number shall be inserted, namely: -

“3A. I am not required to obtain the security clearance from the Ministry of
Home Affairs,Government of India under sub-rule (1) of rule 10 before
applying for director identification number; or

I am required to obtain the security clearance from the Ministry of Home

Affairs, Government of India under sub-rule (1) of rule 10 before applying for
director identification number and the same has been obtained and is
attached. ; and ”.

Features of the Above Amended Rules: -

1. What is the name of this Rule?

The name of the Companies (Appointment and Qualification of

Directors) Amendment Rules,2022.

2. From which date this rule will comes into effect?

This rule will comes into effect from the date of publication in the
Official gazette of India i.e. 01st day of June 2022.
https://egazette.nic.in/WriteReadData/2022/236214.pdf

Page 4 of 7
 3. For whom this amended rules is applicable?

The Amended rules is applicable for the persons who are nationals of the
countries which shares land border with India and seeking appointment as
Director or intends to be appointed as Director in the Indian Companies.

4. Whether this rule is applicable for the person who are national of
the countries which shares land border with India who has
already obtained or holding valid DIN number but not yet
appointed in any company?

Yes, the 2nd proviso inserted in the above rule No.8 is applicable to the
person who is national of the countries which shares land border with
India and has already obtained the DIN number but not yet appointed
in any Indian company and also to the person who is seeking
appointment as Director or intends to be appointed as Director in the
Indian Companies.

Such person has to give obtain the security clearance from the
Ministry of Home Affairs which is to be attached alongwith with the
Consent Form DIR-2 in Eform DIR-12 before his appointment.

5. What declaration has to be given in the Consent Form DIR-2 and

DIR-3 for the persons who are intending to be appointed as
Director?

The Following declaration and Verification has to be given by the

Director in the Consent Form DIR-2 and DIR-3

“I further declare that -

I am not required to obtain the security clearance from the Ministry of
Home Affairs,
Government of India before seeking appointment as director;

Or

I am required to obtain the security clearance from the Ministry of

Home Affairs, Government of India before seeking appointment as
director and the same has been obtained and is attached.

The following verification should be done in the E form-DIR-3

Page 5 of 7
 “I am not required to obtain the security clearance from the Ministry
of Home Affairs, Government of India under sub-rule (1) of rule 10
before applying for director identification number;

or

I am required to obtain the security clearance from the Ministry of

Home Affairs, Government of India under sub-rule (1) of rule 10 before
applying for director identification number and the same has been
obtained and is attached and”.

6. Whether this rule is applicable for the person who are national of
the countries which shares land border with India who has not
obtained DIN number?

Yes, this rule is applicable to the persons who are national of the
countries which shares land border with India who intends to be
appointed as Directors in the Indian Company but has not obtained
DIN number has to first obtain the security clearance from the
Ministry of Home affairs and attach the same in the Form DIR-3 for
applying the Director Identification Number.

7. Whether the Director Identification Number will be processed

without obtaining Security Clearance from the Ministry of Home
affairs for the person who are national of the countries which
shares land border with India?

According to amended sub rule (1) of rule 10 it is clear that, no

application number shall be generated in case of the person applying
for Director Identification Number is a national of a country which
shares land border with India, unless necessary security clearance
from the Ministry of Home Affairs, Government of India has been
attached along with application for Director Identification Number.

8. What will happen to the persons who are already appointed with
valid DIN?
This rule is not applicable for the Persons who are already appointed
with valid DIN before notification of this rules. However, if he or she
resigns and once again seeks for appointment as Director in the same
Company or for any other Company then he or she is required to
obtain security clearance from the Ministry of Home Affairs prior to
his appointment as a Director in that Companies.

Page 6 of 7
Conclusion:

After the above amendment in the rules and form Dir-2, DIR-3, now the
companies, and particularly the Practicing Professionals will take more care
and do much due diligence before applying for DIN number of Appointment
of any non-resident or Foreign Nationals in their Client Companies.

It is important to mention that our Government of India is taking more

efforts to safe guard our Indian Companies from opportunistic takeover of
Management by the Foreign Nationals or Foreign Companies.

The amended rules will definitely help in ensuring that, the FEMA act, its
rules and regulations, FDI policy is duly complied with by the Companies.

News Source:

1. https://pib.gov.in/newsite/PrintRelease.aspx?relid=202359
2. https://economictimes.indiatimes.com/news/india/700-cases-
against-chinese-firms-suspected-of-economic-disruption/
articleshow/91133567.cms
3. https://timesofindia.indiatimes.com/india/40-chinese-booked-for-
becoming-directors-of-desi-companies-fraudulently/articleshow/
90899931.cms
4. https://egazette.nic.in/WriteReadData/2022/236214.pdf

Page 7 of 7